How captured are financial regulators by the climate finance interest?

A look at the Ceres Climate Risk Scorecard

Earlier this week the House Subcommittee on Financial Institutions and Monetary held the hearing, “Climate-Risk: Are Financial Regulators Politically Independent?” The Committee heard from several leaders federal financial regulating agencies and one state county Treasurer.

By a quick scan of the written testimonies, Federal regulators reported on their steadfast actions to ensure financial stability in general. The state Treasurer reported that increasing focus on climate change risk is narrowing financing options for state and counties.

As luck would have it, also earlier this week, the leading climate finance advocacy group, Ceres, released a report detailing an answer to the question legislators posed.

In its third annual Climate Risk Scorecard, pictured above, Ceres looked to illustrate the extent to which financial regulatory agencies have addressed climate related financial risk.

But, Ceres is no bit player in climate finance risk politics. Their work goes way back to the beginning, in the establishment and directed use of standards, and grassroots mobilization of climate risk disclosure regulation. And more. The organization’s coalition building activities has drawn the attention of the chairman of the House Committee on the Judiciary who recently subpoenaed the emails of Ceres President, Mindy Lubber.

The methodology of the Climate Risk Scorecard has changed a bit to align the recommendations found in a report on climate financial risk by the Financial Stability Oversight Council.

The FSOC report was produced at the direction of President Biden’s EO 14030 about a year after Ceres produced its own report of 50 recommendations for financial regulators. Biden tagged the National Climate Advisor to co-coordinate the federal government’s climate related financial risk strategy. At the time, the National Climate Advisor was Gina McCarthy, who had just left the Ceres board for the White House.

All things considered, the Ceres scorecard is a stoplight indicator of the extent of industry capture of its regulators.

Regulatory Capture

The classic conception of regulatory capture posits that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”

More recent scholarship moves away from viewing regulatory capture by special interests as a binary (yes/no) towards a gradient (strong/weak). Political scholars Carpenter and Moss provide a definition of capture that provides more texture,

regulatory capture is the result or process by which regulation, in law or application, is consistently or repeatedly directed away from the public interest and toward the interests of the regulated industry, by the intent and action of the industry itself. 

The scholarship accepts that capture can include shaping agency assumptions, viewpoints, and vocabularies.  This type of “cultural capture,” recognizes the inherent social dynamics of the regulatory process and complex system of conflicts of interests that lend to the creation of subgovernments. 

How important is cultural capture?

Legal scholar, James Kwak, who detailed the concept, attributes the 2008 Financial Crisis to it. Kwak and colleague write,

Capture does not imply that regulators are corrupt, or that their actions are motivated by their personal interests. By contrast, regulatory capture is most effective when regulators share the worldview and the preferences of the industry they supervise.

Senator Warren agreed with the argument. The Government Accountability Office has also described problems with the Federal Reserve and how it creates opportunity for regulatory capture.

Capture as detailed by the Ceres Scorecard

The Ceres scorecard illustrates a gradient of regulatory capture by the climate financial risk interest.

It is clearly not a binary but a range of strong and weak capture. On the end of stronger capture is the Federal Housing Finance Agency, Treasury, and the SEC. The least captured is the Public Company Accounting Oversight Board, National Credit Union Administration, and the Federal Deposit Insurance Corporation. Evidently, the FDIC was unmoved by the FSOC report and refused to sign off on it for want of “a little bit more nuanced analysis as to what exactly kind of a risk [that climate change] presents”.

Items #1 through #4 are forms of cultural capture. In particular, #1, which all agencies get a green check on item #1 which Ceres points out is not a FSOC recommendation. It is a statement of shared worldview.

Item #2 has also seen the most headway. Building capacity puts people in the agencies through hiring and training that are amenable to the cause and sympathetic to the needs and goals of the climate change risk industry.

Item #3 and #4 are also statements of values.

Items #5 through #8 address matters of process. They consider the analytical assumptions embedded in the regulatory regime such as the processed developed by the GHG Protocol and SBTi.

They also gauge the extent to which they align with the activities of leading players in the climate change financial risk interest groups such as, NGFS, TCDF, WRI, WWF, CDP… and of course Ceres who advocates for alignment with the foregoing.

Item #9 is the holly grail; the sign of full capture. The SEC has made the most progress with their proposed rules directing industry to implement the analytical activities promoted by the interest groups (here and here) and reflected in the processes outlined in #5-#8.

Regulation that deviates from the public interest

Regulation in and of itself is not problematic. And regulation is desirable.

The problem comes when regulation favors the special interest in sacrifice of the public interest.

Whatever the merits on climate related financial risk disclosure, popular methods and much of media reporting on climate change utilizes information resulting from lapses in scientific integrity.

Scientific integrity is in the public interest because reliable empirical knowledge provides a sound basis from which to develop and assess policy options, and hold policymakers accountable for their choices.  

Science that lacks integrity is little more than political ideology expressed in technocratic terms. It undermines democracy by obscuring the locus of accountability for decision outcomes. And it is dangerous for society because it injects unnecessary ignorance into the decision making process- in this case, the global financial system.